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Commencing a pension

Once you reach your preservation age, at your option, you may commence a transition to retirement income stream. You can commence a transition to retirement income stream whilst still employed.

When you retire, you can commence a pension.

The main difference is that the transition to retirement income stream pays benefits before retirement whilst a pension pays benefits after retirement.

Self managed superfund can pay to a member the types of benefits described.

Transition to retirement pension (pre-retirement)

A transition to retirement pension allows you to receive your superannuation benefits as an income stream even whilst you are still working if you have reached your preservation age.

The pension account is converted from the monies accumulated in the superannuation fund. Investment earnings are added to the account and pension payments are deducted from the account until the account balance is fully paid out or commuted.

Account based pension (post-retirement)

An account based pension is a way of receiving your superannuation benefits as an income stream, instead of a lump sum, after you have reached your preservation age and permanently retired or have satisfy another condition of release.

The pension account is converted from the monies accumulated in the superannuation fund. Investment earnings are added to the account and pension payments are deducted from the account until the account balance is fully paid out.

Taxation of benefits

In the superannuation fund

When you convert your superannuation to a pension, there is no tax payable. The earnings from the capital that support the pension is also tax-free.

Member over the age of 60

Your pension payments and any lump sum withdrawal are tax-free. The trustee is not required to report the pension payment to the Australian Taxation Office (you are not required to include these payments in your income tax return).

Member under the age of 60

Part of your pension payment may be tax free (tax-free component, generally consisting of undeducted or non-concessional personal contributions), and the balance will be taxable. The taxable component of your pension payments are tax at your marginal rate plus Medicare levy. You will also be eligible for a 15% tax offset.

What do I need to do to commence either a transition to retirement pension or an account based pension?

You should ensure that the conversion from accumulation to pension is effective and appropriately documented. To have Superannuation Accounting Services prepare a pension commencement pack (all necessary minutes, forms and pension payment agreement) for you, download the Commencing a Pension form here or contact us on 1300 735 254 to obtain one, complete it and return to us.

FAQs

Do I need to close down the SMSF and start a new one for pension?

No - if your self managed superfund's trust permits, a member can seamlessly transfer from accumulation phase to pension phase, including to transition to retirement income stream. There is no requirement to close and restart a new SMSF for pension.

Seamless transfer means paying no capital gains tax, for example, capital gains from shares bought when you were in accumulation phase, then sold after you commence pension is tax free.


Can self managed superfund pay member benefits in the form of a pension?

Yes - subject to the self managed superfund's trust deed. A member can seamlessly transfer from accumulation phase to pension phase, including to transition to retirement income stream.

Seamless transfer means paying no capital gains tax, for example, capital gains from shares bought when you were in accumulation phase, then sold after you commence pension is tax free.


Can a transition to retirement pension be cashed as a lump sum?

No - a transition to retirement pension cannot be cashed as a lump sum - part or whole.

Once a condition of release is satisfied (e.g. retirement or turn age 65), the transition to retirement pension can be converted to an ordinary pension or cashed as a lump sum.


Once I commence a pension, can I still contribute to the fund?

Yes - you can commence a pension (including a transition to retirement pension) and still contribute to the SMSF. In this situation, you will have 2 'account' in the SMSF. One being the pension account which will pay you the benefits and the other is an accumulation account that you are contributing to. The accumulation account can accept all types of contributions, including employer contributions, salary sacrificed contributions and personal contributions.


When does a SMSF require an actuarial certificate?

A SMSF paying an account-based pension requires an actuarial certificate if the assets supporting the pension is not segregated from other assets in the fund. An actuarial certificate will determine the portion of income that is tax exempt.

Where the assets are segregated, no actuarial certificate is required for eligibility for income tax exemption.